Question -
Answer -
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if he/she spends his/her entire income on that good?
(iii) How much of good 2 can be consumed if he/she spends his/her entire income on that good?
(iv) What is the slope of the budget line?
Answer
(i) P1 =Rs 4
P2 = Rs 5
M = Rs 20
Equation of the budget line = P1x1 + P2x2 = M
4x1 + 5x2=20
(ii) If Rs 20 is entirely spent on good 1, then the amountof good 2 demanded will be zero i.e., x2 =0 as the consumer has no income left to spend on good 2.
4x1 + 5 (0) = 20
4x1 = 20
Amount of good 1 consumed = 5 units
(iii) If Rs 20 is entirely spent on good 2, then x1 = 0, as the consumer has no income left to spend ongood 1.
4(0) + 5(x2) = 20
5(x2) = 20
Amount of good 2 consumed = 4 units
(iv) Slope of the budget line = 
